05-12-2020: Building a Sell-Off Strategy

There are a 'relatively' small group of socks that have, for the most part, been immune to the 30% sell-off that we saw in March. In fact, some of these stocks have been steady growth performers for years and what is unique about them is their 200-day moving averages have been almost devoid of TIPs (Trend Inflection Points).

As a reminder... a TIP occurs when the market changes its 200-day moving average slope from bull-trending to bear-trending or from bear-trending to bull-trending. 99% of the universe of stocks have TIP events on a regular basis; sometimes multiple times per year. But, as mentioned above, there are a few that rarely (some almost never) have a TIP event.

So what... you may be asking...

These special 'Low-TIP' stocks seem to be less prone to major sell-offs, regardless of what the broader market does. Now... think about that... If a growth stock almost never falls below its 200-day moving average, what do you think the benefit would be to own a stock like that? The benefit could be significant... it could mean that these stocks, while not immune to massive bear market events, tend to weather medium to large pull-backs in the market and, over time, grow in price appreciation. They are not "buy-and-hold", but they are "buy-and-hold-a-bit-longer". They tend to be anti-whipsaw stocks.

We have developed an algorithm that identifies these Low-TIP stocks and then scores them for fundamentals so that we can pick the best of the best. I am, frankly, quite excited to now have access to this proprietary technology that my R&D staff has developed.

But... there is a bit of a downside to owning these bell-ringer stocks... stops will be far lower than 'normal'. In the past, I would use a stop set just below the amount a stock's price could move against me in the upcoming trading week and still be in an up-trend. The Low-TIP stocks have a stop at the 200-day moving average, which can often be substantially lower than the weekly stops I have used in the past.

What this means is this... We will be holding onto positions for longer periods of time and we will be experiencing situations where interim losses can be greater than in the past, but we will, at the same time be avoiding a lot of the whipsaws that would bounce us into and out-of the market far too often. This is a delicate dance... holding on to a position long enough to avoid a whipsaw, but not holding on to it so long as to experience a major loss. But, then, that's why you hire me... to deal with these conundrums.

I will be, primarily, applying this TIP algorithm to holdings in the Tactical Growth portfolio strategy; one of my most conservative strategies. Total Market, ULTRA, ULTRA-MAX and Diversified Income are not structured to benefit that much from the TIP algorithms because of the types of holdings in these strategies and the objectives that are quite a bit different than what we have in the Tactical Growth portfolio strategy.

Now... to the market today and my plans for tomorrow...

If you are an avid reader of my blog posts (my thanks to you!), you will recall that I am of the opinion that publicly-traded companies will use the virus pandemic as an excuse to throw all their dirty laundry that they have kept hidden onto their quarterly reports; and blame the ugly decision-making, failed acquisitions, underperforming product lines, poor divisional performance, etc., all on the pandemic ; and, definitely NOT on their management prowess or lack thereof. I have not changed my opinion on this.

In fact, I see this same 'don't blame me' game now being used by poorly managed States. Just today, a group of States (I won't mention which ones) who have governors of a particular party (I won't mention which one) who have been horribly mismanaging their State's obligations for years and many of them facing a financial collapse BEFORE the viral pandemic, are now asking for trillions of dollars to bail them out and they are blaming the cause of the financial hardship totally on the coronavirus.

With Congress just itching to throw another $3 trillion dollars into the 'keep America from collapsing' strategy, it will not surprise me to see the Federal government bailing out these poorly (ineptly) run States in the process. This pandemic is a god-send to these financially destitute States.

And, why does this matter to us? The more money we throw at a problem that did not occur because of the shut-down of our economy, the more we reward bad behavior. At some point, we (all of us) will have to pay the bill that Congress is running up.

On a related note... I heard today that many small restaurants that are trying to reopen cannot get their staffs to come back to work because they are now making more money sitting at home and collecting government hand-outs than working.

We do not know where this story will end. My hope is it ends soon and very positively, but it may not end well at all.

My plans for tomorrow... Well, the market sold off hard into the close today and is dropping a lot more in after-hours trading. But, you know and I know a lot could change before the opening bell tomorrow. I'm really looking forward to a big down-day tomorrow for my Delta-Neutral test that is ongoing. And, I may decide to put some inverse ETFs in play if there is enough downside momentum in the market and the inverse ETFs. But, this on-again-off-again market is a crap shoot. I am reluctant to put a lot of bear-biased trades on until I see a lot more conviction than a day or two. I may well look to add another Low-TIP stock or two to Tactical Growth if I can pick up a near-term bargain on the sell-off.